And, while the number actually came in slightly better-than-expected (many economists were expecting a number beginning with 7, rather than the 6.8% annualised decline reported) it further muddies economic waters slick with geopolitical uncertainty and concerns about energy stability.
Yet, despite continued conflict in the Ukraine, Iraq and Israel and renewed ambiguity toward the recovery in Europe, on the whole investors seem pretty unconcerned.
Nick Samouilhan multi asset fund manager at Aviva Investors, points out that if you look at how the market is pricing risk at the moment, it is exceptionally low; people don’t seem to be too worried. But, he adds: “Investors have a tendency to confuse volatility with risk, and while there is low volatility, there is not, necessarily low risk.”
Andrew Herberts, head of private client investment management UK at Thomas Miller Investments agrees, saying that clients have not been clamouring to take risk off the table, “if anything they are looking to take advantage of any down turn to add more risk,” he says.
And he adds: “Broadly speaking, the fundamentals for equities and commodities aren’t bad. But, this fundamental tailwind is being offset by the geopolitics and, as a result, we have been moving to an increasingly neutral position.”
Ways to play it
PSigma CIO, Thomas Beckett, says that how to insulate a portfolio from geopolitical shocks is a particularly pertinent question at this time, as “there are a number of tinderboxes sparking at the same time”. But, he says, “preparing a portfolio for geopolitical flashpoints is fraught with difficulty and our conviction is that ultimately asset valuation will ensure whether you make money or not.”
And, he adds, “If, as has been the case in recent months, valuations have become stretched, then rising political temperatures will cause cooling sentiment in markets. If valuations are cheap, such as they were at the start of the Iraq war of 2003, then markets can withstand the heat.”
One of the difficulties currently facing investors is that a number of the more traditional safe havens are not looking particularly attractive.
For many the first port of call for safe haven has been the government bonds of core economies. But, at the moment, there is a reluctance to invest in these bonds because yields are already low and in the US and the UK, the next move in rates is likely to be up.
As Samouilhan points out, on any realistic long term horizon, they don’t make sense.
“At best you pick up a low yield if rates stay where they are, at worst you stand to lose a lot of money if rates rise quickly from here,” he says.
Gold is the other asset that is often cited as a safe haven, but for many investors the metal has not seemed very safe of late.
According to Neil Gregson, manager of the JP Morgan Natural Resources Fund, the main drivers behind gold’s recent upward spikes have been concerns about financial instability, particularly the massive uncertainty that was created around the impacts of long term money printing and, more recently fears of a collapse of the eurozone.
However, he says, people tend to want safe havens only when they can see the fires burning.
“In the current context many believe the fires have receded. From a gold price point of view, the geopolitical issues that we have seen over the last 12 months has not been sufficient to compensate for the view that growth in the developed world.”
One of the areas Samouilhan says Aviva has been looking at recently is dollar-denominated assets because the dollar is likely to do well should any of the ‘economic plumbing’ issues that have plagued the global financial system flare up again.
According to Herberts, another avenue to explore is uncorrelated assets like catastrophe reinsurance. But, he adds, the group has also upped it cash levels recently. He says, higher cash levels mean that if a geopolitical event sparks a short term correction, cash enables one to take advantage of the downturn and, if it proves longer in duration, then one is somewhat insulated from the falls.
For Beckett, in any correction, whether geopolitically-inspired or not, cash is king. Thus, he says, the group has upped its cash positions significantly.
“However,” he adds, “with gold having performed very poorly in the last few years and looking technically poised for gains, we had been recommending that all our portfolios held a decent level in gold as an insurance policy.”
There is no doubt that there are a number of potential political flash points that could derail the recovery currently underway. But, likewise, it could turn out that all of these crises and potential crises end up being resolved without significant economic incident. But, either way, it remains important to guard against complacency.
As Herberts says:“At the moment, investors should be looking to stay nimble, they investors should be prodding their portfolios, stress testing them.”
